# What’s Your Number?

How much investment capital do you need to live comfortably throughout your retirement? Given some reasonable rate of withdrawal, and taking into account Social Security and any fixed pension benefit you may have, what figure, in today’s dollars, would you need to start with on your retirement date? In other words, what’s your number?

There’s actually a pretty simple algorithm for figuring this out. As an illustration, let’s assume you plan to retire in 10 years, and the total income you’ll need each month in your first year of retirement is $15,000 in current dollars. (For presentational simplicity, we ignore all tax considerations; sophisticated financial planning calculations incorporate all taxes applicable to a person’s individual situation.)

Let’s further assume you have no corporate retirement plan or other sources of retirement income other than $2,500 of monthly Social Security, which will be adjusted upward annually for inflation. So you’ll need your investments to generate the remaining $12,500 each month.

Note that your investments don’t have to yield $12,500 in interest or dividends. Instead, we’re calculating an amount that you’d be comfortable **withdrawing** each month to support your lifestyle.

We also must account for inflation, which we’ll assume to be 2.5% annually for the next 10 years until you retire. Thus, the $12,500 requirement in current dollars inflates to about $16,000 in future dollars. So on an after-tax, inflation-adjusted basis, you’d need $16,000 per month, or $192,000 annually, from your portfolio.

**Safe withdrawal rate: The 4% guideline**

To try to keep your capital intact and even give it a chance to keep growing, you’ll want to **withdraw no more than 4% per year**.

Based on pioneering research in the early 1990s by William Bengen, then a financial planner in California, the 4% guideline says retirees can pull about 4% annually from their nest egg, with a high probability their savings will last 30 years.

Bengen never claimed his findings were right for every retiree. He started with a very specific set of assumptions, but if you change just one of those parameters—such as asset allocation or length of withdrawal period—the “safe” withdrawal rate also changes. Trying to determine optimal withdrawal rates has become a Holy Grail for the financial planning industry; suffice it to say there are now many different strategies based on various underlying assumptions. Nonetheless, we can use 4% as a reasonable starting point.

To determine the required capital sum for our example, we divide $192,000 by 4% (equivalent to multiplying by 25), which is $4.8 million. **That’s your number—the amount you would need initially.**

Keep in mind that this is a rule of thumb and not a guarantee. Because the markets are unpredictable, there is no such thing as a perfectly safe withdrawal rate.

The following chart from J.P. Morgan shows historical ending wealth based on a 40% equity/60% bond allocation with a 4% initial withdrawal rate over 66 rolling 30-year periods from 1928 to 2022. In this simulation, the portfolio had an ending value greater than $0 in 85% of the scenarios and ran out of money 15% of the time.

*Source: J.P. Morgan Guide to Retirement, 2023*

Remember, the simulation is predicated on a 40% equities, 60% bonds allocation mix. We do ** not** advocate this allocation; in fact, we typically recommend a significantly higher allocation to equities for retirees, which tends to significantly enhance the portfolio’s value over time in most scenarios. (See “The Case for a 0% Allocation to Bonds in Retirement,” which we published in 2019.)

Also, a dynamic approach that adjusts the withdrawal rate over time is typically more effective than a static withdrawal rate.

**Special cases**

While the 4% guideline is useful in determining the required amount for an investment portfolio to fund retirement, it does not work for determining the appropriate amount needed to cover living expenses in special situations, such as a divorce before retirement or the lifetime care of a disabled dependent. Such situations require customized financial planning and analysis.

**Planning for lifetime income**

Once you know your number—where you want to be at retirement— your next task is to figure out where you are right now. In other words, how much do you already have saved for retirement? Then, you need to assess the gap, if any, between those two numbers.

Assuming there is a gap, you’ll need to determine how much time you have to close it—that is, how long until retirement? Finally, what additional sums can you contribute in the interim? You can run all these numbers on your own, or a financial planner can help you.

With those data points, the next step is to calculate the rate of return you’d need to obtain between now and retirement to close the gap and figure out whether that rate of return is realistic. If the required rate of return is not realistic, there are still options. For example, you could retire a bit later than you’d planned or start off at a lower income. A financial planner may be able to help you come up with other alternatives.

Using this simple process, you can quickly establish a rough idea of where you are and where you need to get to. Then, with the assistance of a financial adviser’s sophisticated planning software, you can determine an appropriate portfolio to get you there.

Staying the course with that portfolio (and any rebalancing it may require) over time and through normal market gyrations is another challenge entirely. This is where a behavior-focused financial adviser can really make an important difference.

**Two key components**

The two key components of planning for lifetime income in retirement are:

- Ensuring that you truly have a
**lifetime**income—not just enough to support you on the day you retire, but enough capital to provide an income that can sustain your lifestyle through a longer retirement than any previous generation has enjoyed.

- Proactively
**planning**to achieve that lifetime income—not just taking an investment portfolio into retirement and hoping it will last.

No one can predict the economy or what markets will do, so it’s essential to plan effectively and create a portfolio that will weather most storms.